1. Eaton Vance CEF Dividend Reductions: Several of the Eaton Vance closed end funds lowered their dividend payouts. Eaton Vance Equity Income Closed-End Funds Declare Distributions and Announce Distribution Changes Among those funds, I own EOI, EXG and ETW. The largest cut was a 14.2% reduction in EXG's quarterly payout to $.244 per share. All of these funds have been supporting their payouts with returns of capital. Return of capital information is available to non-subscribers at the Morningstar site. As shown at that site, EXG has supported a large portion of its payout by returning its investors capital. Morningstar refers to this practice as a "destructive return of capital", and I would not disagree with that characterization whenever the dividend is not substantially supported by earnings.

Part of the problem for these funds is due simply to the catastrophic bear market from October 2007 to March 2009, which took away the option of supporting the dividend with realized capital gains. Given the use of tax loss carryforwards to offset future capital gains during the current bull run, this source of support will likely remain absent for awhile longer. I would support a reduction in dividend payments in order to bring the amount paid more in line with earnings before application of the tax loss carryforwards. Other individuals will sell after a fund announces a dividend cut.

The last shareholder report for EXG showed a total cost for its investments at $2.971 billion and a total value of $3.120 billion, as of 10/31/2011. (page 6: Eaton Vance Tax-Managed Global Diversified Equity). Even without using tax loss carryforwards, that kind of unrealized appreciation is not likely to provide much opportunities for consistent realized capital gains sufficient to support a large dividend payout. The market has improved since 10/31/2011, and the unrealized gain number is hopefully higher now. Still, I doubt that the current number would change my conclusion. In note 1 D at page 14, the fund reveals that it has a capital loss carryforward of $1.141712317 billion. That kind of loss with just smother reasonably anticipated capital gains for an extended period.

2. Housing Bubble In Canada?: I have read a number of articles recently relating to a possible housing bubble in Canada. Some of the statistics are worrisome. Housing prices have risen at a much faster rate than incomes. In developed economies, average wage increases are not going to be 10% to 20% per year, needless to say. When home prices are accelerating at a higher rate than wages, a decline in home prices becomes inevitable.

If I was running one of the large Canadian banks, and looked at those numbers, I would not dismiss them or try to explain them away. Instead, I would substantially cut back on the origination of new mortgages. I would also hedge my existing portfolio as wells as sell down my mortgage position.

I would add that the savings rate is higher in Canada than the U.S. The U.S. personal savings rate declined below 2.5% in the waning years of the housing bubble as consumer debt obligations exploded to the upside.

I do not own any of the Canadian financial institutions individually. I do own 300 shares of the BMO Dow Jones Canada Titans 60 Index, an ETF traded on the Toronto exchange, that is heavily weighted in those financial stocks. That is why I am monitoring the situation to some degree, though I would add that it is difficult enough to keep up with what is happening in the U.S. and it is obviously much harder to both comprehend and monitor developments in non-native lands. I have visited Canada once in my life and that was in 1968.

3. Pared Trade in ROTH IRA: Sold 100 GJS at $14.9 and Bought 100 GYB at $17.2 Last Wednesday (see Disclaimer): Both of these securities are Synthetic Floaters in the Trust Certificate form of ownership. The underlying security in both TCs is a Goldman Sachs bond. Both securities have $25 par values. That is where the similarities end.

The underlying security in GJS is a GS senior bond maturing in 2033. Interest payments can not be deferred.

GYB contains a trust preferred from GS Capital, and that TP represents an undivided interest in a GS junior bond maturing in 2034. Interest payments can legally be deferred for up to five years, provided no activation of the stopper clause (e.g. by a dividend payment on the common stock or the GS equity preferred stocks). As a practical matter, I doubt that GS would ever defer an interest payment on its TPs, which would require the elimination of its common and non-cumulative equity preferred stock dividends, short of a bankruptcy filing. That kind of deferral and elimination to "preserve capital" would send clients to the exit by the droves.

Importantly for now, GJS has no minimum coupon and is currently paying monthly interest payments at .9% over the 3 month treasury bill rate. Prospectus That rate is of course hugging zero now. Consequently, I have not received much income from this security, less than $2 per month for 100 shares, and will unlikely receive much of a rise for as long as the Fed continues its Jihad Against the Saving Class.

GYB pays quarterly at the greater of 3.25% or .85% over the 3 month LIBOR rate on a $25 par value. Prospectus The minimum coupon is the applicable rate now. At a total cost of $17.2 and at the 3.25% coupon rate, the effective current yield would be about 4.72%, much better than the current yield of GJS. Moreover, over the long term, a .85% spread over a 3 month LIBOR rate would be better than a .9% spread over the three month treasury bill based on the historical spreads between those two rates. So part of the disadvantage of GYB's higher cost per share, in periods where the float provision becomes the applicable rate, would be negated by that slightly better float provision.

At a 6% 3 month Libor rate during a computation period, not likely to happen anytime of soon of course, the yield would be about on an annualized basis. (.06% 3 month LIBOR + Spread of .0085%=.0685% x. $25 par value=$1.7125 divided by total cost of $17.2=.09956%)

Both securities have room to run to the upside, given their respective $25 par values, assuming no adverse GS credit event. I would not anticipate a substantial rise closer to the $25 par value unless short term interest rates were moving up during a well recognized period of FED tightening.

Long term GJS may be the better security given its greater discount to par value and a return to normal treasury bill rates.

The GJS shares were sold near break-even, achieved only after I averaged down by buying 50 shares at $13.25. I have previously exited the position at a profit.

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About Me

I am no longer in a capital accumulation phase. My key investment objectives are capital preservation and income generation.
I started to buy stocks in the late 1960s.
I have a balanced worldwide portfolio with a considerable allocation to cash. Starting in December 2016, I started to reallocate out of cash and into high quality short and intermediate term bonds and FDIC insured CDs using a ladder strategy.
I have been paring my stock allocation, selling gradually into the robust stock market rally occurring since the U.S. election.
In this blog, I will be discussing only a sample of my recent stock trades. I will be discussing almost all of my bond and CD trades.

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Disclaimer

I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this blog, I am acting solely as a financial journalist focusing on my own investments. The information contained in this blog is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this blog is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. For purchases of bonds and preferred stocks, the prospectuses need to be reviewed until fully understood by the investor.